Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/176903 
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper No. 6884
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We investigate how irreversibility in “dirty” and “clean” capital stocks affects optimal climate policy, from both theoretical and numerical perspectives. An increasing carbon tax will reduce investments in assets that pollute, and so reduce emissions in the short term: our “irreversibility effect”. As such the “Green Paradox” has a converse if we focus on demand side capital stock effects. We also show that the optimal subsidy increases with the deployment rate: our “acceleration effect”. Considering second-best settings, we show that, although carbon taxes achieve stringent targets more efficiently, in fact renewable subsidies deliver higher welfare when policy is more mild.
Subjects: 
infrastructure
clean and dirty energy inputs
renewable energy
stranded assets
carbon budget
climate change policies
Green Paradox
JEL: 
O44
Q54
Q58
Document Type: 
Working Paper
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